During your retirement years, the list of expenses you’ll face can be daunting. For those who have paid off their home or only have a small mortgage, a reverse mortgage may be a way to help cover retirement expenses. A reverse mortgage allows you to borrow against the equity you’ve built up in your home. By doing so, you can supplement your income and remain in your current home. If you are thinking about this strategy for retirement, you’ll want to know exactly how a reverse mortgage works and evaluate whether it could be beneficial for your retirement years.
Consider these factors before getting a reverse mortgage in retirement:
1. Understand what it entails. Reverse mortgages are available to homeowners who are age 62 and older. To be eligible, you must live in the home as your primary residence.
This type of mortgage operates in a different way than a traditional mortgage. With a traditional mortgage, you make payments each month to a lender. A reverse mortgage is set up so that the lender will make payments to you. The exact amount you receive will be based on the value of your home.
With a reverse mortgage, you keep the title to your home. You’ll also be required to maintain your home, as well as pay property taxes and homeowners insurance.
[See: How to Find the Best Reverse Mortgage Lender.]
2. Look at payment options. There are several ways you can receive funds from a reverse mortgage. You might opt for a lump sum, a line of credit or a monthly payment. You can even select a combination of these.
“To decide what is the best choice for them, homeowners should consider their personal situation and how they will use the proceeds from a reverse mortgage,” explains Bruce Bufe, senior vice president of residential lending for Draper and Kramer Mortgage Corp. “For example, some homeowners are looking for a supplement to monthly income, while others might need to cover a large one-time expense or simply want to have access to funds they can tap into in an emergency.”
3. Check your equity. A reverse mortgage is only a viable option if you have a substantial amount of equity in your home. If you’re still carrying a small mortgage in retirement, you’ll want to talk to a financial advisor to help you evaluate your options. “A mortgage lender can advise on the amount of equity homeowners will need and estimate the amount they will be able to take out,” Bufe says.
4. Ask about fees. With a reverse mortgage, you can expect initial expenses such as closing costs, a loan origination fee and an appraisal fee. You’ll be required to set up a session with a third-party counselor to make sure you understand the loan. In addition, the lender may charge loan servicing fees, and you’ll have to pay mortgage insurance premiums. “Total closing costs of a reverse mortgage can now range between 3 to 4 percent of the home’s value,” says Neil Krishnaswamy, a certified financial planner at Exencial Wealth Advisors in Frisco, Texas. “These costs are mostly financed into the loan and not paid in cash.”
[See: The Best Places to Retire in 2018.]
5. Think long-term. Reverse mortgages typically become repayable when you pass away. However, the loan will also need to be repaid if you sell the home or move out of it. “If you know you’re going to be moving within five years, consider other ways to meet your cash flow needs for that time period,” Krishnaswamy says. “That is because you cannot recoup the upfront closing costs of a reverse mortgage when you move.”
6. Talk to family members. If you have been planning to leave your home to your heirs, a reverse mortgage may not be the right option. “The safest bet with a reverse mortgage is to assume you will use all the equity in your home,” says Todd Huettner, president of Huettner Capital in Denver. In many cases, the home will need to be sold to pay off the loan. That means family members would need to provide funds or financing to cover the loan amount at that time. Before getting a reverse mortgage in retirement, sit down and talk with loved ones who may be interested in your home at some point.
7. Know how you will use the reverse mortgage. While a reverse mortgage could provide the funding to cover a kitchen renovation, family trip or ongoing living expenses, it’s important to set up a plan beforehand so you know how the cash will be directed. Your age will play a significant role when determining how to use the funds from a reverse mortgage. If you’re in your early 60s, for instance, you’ll likely want to avoid unnecessary spending, especially if you are concerned about running short on funds later in retirement.
[See: 10 Ways to Reduce Your Housing Costs in Retirement.]
8. Look over other options. If you are short on financial resources, have no family members interested in inheriting your home and no desire to leave your home, a reverse mortgage could fit well for your situation. But if you take some time to evaluate the big picture of your retirement, you may find you have additional options or interests. “If you have other income and assets, you can often find ways to utilize the equity in your home more efficiently than with a reverse mortgage,” Huettner says. You might opt to refinance your existing mortgage, sell the home to your children or downsize to a place in a retirement community.
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8 Factors Retirees Should Consider Before Getting a Reverse Mortgage originally appeared on usnews.com
